Fannie Screws Condo, Co-op Bldgs (even older ones?)

Whenever there has been a downturn in the market ans the resultant turning off of the cash spigot, banks have enacted myriad new rules for Coop and Condo buildings as an excuse not to lend. Perhaps the most bizarre was last go around when they had a rule where the "pro rata share of the building's underlying mortgage could not exceed a certain percentage of the purchase price". In other words, they divided the building's mortgage by the number of shares in the building, then multiplied by the number of shares for the unit to come up with the dollar figure of what the unit's "share" of the underlying was. They then divided this number by the purchase price, and if it was above a certain number (some banks 30%, other 50% and everywhere in between) they would not make the loan.

I guess the reason is they decided that this would save them from lending in "over leveraged" buildings. But the particular formula - as often happens in times as these - didn't make sense. Take two apartments in the same building and worth the same amount of money having equal share counts. Let's also say it's a 100 unit building where all apartment have 10 shares and the building has a $10,000,000 underlying mortgage. So, it's pretty easy to see each unit has a "pto rata" share of $100,000 of the underlying mortgage.

Well, if you get a great deal and get a contract on a unit for $200,000, your "pro rata share" under this formula is 50% ($100,000 pro rata share of underlying over $200,000 purchase price). No bank would lend you 80% / $160,000 on this purchase. OTOH if you got ripped off and paid $400,000 your pro rata was $100,000 pro rata share of underlying over $400,000 purchase price - i.e. 25% and you could get 80% / $320,000 mortgage on the unit. OBVIOUSLY in term of actual risk, the second loan is far, far riskier for the bank to make. But when they money tap gets turned off, theee are the types of arcane rules which the banks come up with.

If anyone remembers, a lot of banks stopped lending on studio apartments, some stopped lending on studio apartments under 500 quare feet, some stopped lending on A.I.R. buildings (basically all of Soho and Noho), the list goes on and on.